Delaware Court Provides Guidance for Structuring Top-Up Options


Tender offers are becoming increasingly common in leveraged transactions, due in part to the recent acceptance of top-up options by the Delaware Supreme Court.1 A top-up option is an option to acquire newly issued shares in a target upon the consummation of a tender offer. Top-up options are used to ensure that once the minimum tender condition is met, the bidder is able to acquire a sufficient number of the target’s outstanding shares to allow for a short-form merger to be closed on the same day as the consummation of the tender offer. Top-up options are now nearly universally granted to buyers in negotiated tender offers.

In a recent decision by the Delaware Court of Chancery, Vice Chancellor Laster provided guidance for structuring valid top-up options.2 In light of the ev3 decision, we recommend addressing the following when structuring top-up options:

1. Appraisal Dilution

Although the Delaware Court of Chancery has not appeared to give much credence to claims that top-up options coerce stockholders to tender because of the threat of appraisal dilution, the parties should nonetheless consider including in the merger agreement a provision that in any appraisal proceedings the fair value of the dissenting shares shall be determined without regard to the top-up shares or their related consideration. In ev3, Vice Chancellor Laster noted that including such a provision fixes any uncertainty regarding the role of top-up options (and any related promissory note) in the appraisal process. An example of such a provision is as follows: “The parties agree and acknowledge that in any appraisal proceeding with respect to Dissenting Shares and to the fullest extent permitted by applicable Law, the fair value of the Dissenting Shares shall be determined in accordance with Section 262(h) of the DGCL without regard to the Top-Up Option, the Top-Up Option Shares or any cash or Promissory Note paid or delivered by MergerSub to the Company in payment for the Top-Up Option Shares.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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